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It is reasonable to assume that global yields move in tandem to a certain extent, driven by a global and a local component. Are there any ways to separate the two, beyond the obvious (regress the local yield changes onto an average change across all yields)? Any pitfalls, like expected/unexpected changes, credit risk, inflation etc?

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    $\begingroup$ In short, yes. This depends on your application, though: for risk purposes you may see a decomposition into rates, sector, company and single instrument. $\endgroup$ – Kermittfrog Apr 7 at 16:30
  • $\begingroup$ @Kermittfrog any references? $\endgroup$ – Igor Pozdeev Apr 9 at 8:45
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I subscribe to a theory, originally postulated by Kapitsa, Jr. in Модель роста населения Земли и экономического развития человечества, that the main predictor for the global yield component would be the population growth rate. The challenge with incorporating such variables in regression analysis is that one needs to have access to time series which span 100+ years. This data is unavailable for many countries.

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  • $\begingroup$ thanks. still, this does not answer the question of how to take out the global component of yield dynamics from local yield changes. $\endgroup$ – Igor Pozdeev Apr 9 at 8:48
  • $\begingroup$ You can approach this by creating a GDP-weighted global yield index based on constant maturities, and then calculating beta for each country returns, as correlated with global returns. $\endgroup$ – Sergei Rodionov Apr 9 at 9:34
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Yes, there IS a global yield common component here. PCA on 2s, 5s, 10s and the long-end of yield curves would objectively describe this for you.

I agree with the earlier answer that population growth is an important factor here; but there are others. Demographics is one half of this; the other is productivity, ie the output per worker. Faster growing (for either reason) economies will tend to have higher interest rates/yields. All of this before we start to think about different inflation rates in different currencies :-)

Short answer is that yields globally ARE regionally correlated, because global growth is an important factor in all of them regionally.

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  • $\begingroup$ thanks for your input. however, i am interested in the commonality of yield changes for a given maturity. pca on 2s, 5s, etc would not give any insight into it. pca on changes in 2s across countries could, but is not 'beyond the obvious...' in my question $\endgroup$ – Igor Pozdeev Apr 9 at 8:44

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